The strong performance of SA hedge funds will soon be accessible to retail investors

Retail investors in South Africa will soon be able to invest in hedge funds, some of which out-performed the JSE by almost four times in the year ending 30 June 2015.

Eugene Visagie, Head of Hedge Fund Investments at Novare Investments, noted: “Of the R62 billion in assets managed by the South African hedge fund industry at the end of June this year, 60.9% was invested in the equity long/short strategy, which attracted the majority of capital inflows based on sustained strong investment performance.

“Despite heightened volatility in the local equity market, the equity long/short strategy faired well over the 12 months to June this year when the average compound return was 14.7% against the 3.7% achieved by the FTSE/JSE All Share Index.

“Similarly, the equity market neutral strategy, where the portfolio manager does not take an explicit view on the direction of the market but focuses instead on arbitrage opportunities, delivered an average return 9.9% over the same measurement period.”

All other hedge fund strategies also delivered strong results over the measurement period.

The average Sharpe ratio, which measures the unit of risk taken relative to each unit of return, was 2.17 for the equity long/short strategy, 1.63 for fixed income, 1.52 for equity market neutral, and 1.19 for multi-strategy. This compares to the All Share Index with a Sharpe ratio of 0.18 and the All Bond Index of 0.85.

South African hedge funds not only delivered solid returns locally, they fared equally well when compared to their international peers.

According to a recent study concluded by Preqin Hedge Fund Analyst, looking at hedge funds across the globe, South African managers ranked exceptionally well. In the equity strategy category consisting of 518 funds, covering the period from June 2010 to June 2015, South African funds took the first four spots, and six out of the top ten as the best performers.

Visagie said, “Although the South African hedge fund industry is small in the global context, the recent adoption of new regulation brings the domestic industry in line with global financial markets standards and will also allow retail investors to access these portfolios.”

Highly anticipated hedge fund regulation was released in February 2015 as a separate pillar under the Collective Investments Schemes Control Act (CISCA), which encompasses unit trusts.

The classification of hedge funds as collective investment schemes places their oversight and supervision under the jurisdiction of the Financial Service Board (FSB).

New regulation has a big focus on risk management and compliance monitoring, with regular reporting to both the registrar and investors. Visagie added that this would provide additional comfort for new investors making financial allocations to hedge funds.

A tiered approach has been adopted by the regulation, with the establishment of two types of hedge funds, one for retail investors and the other for qualified investors. The two types of hedge funds are regulated differently, with the oversight of retail hedge funds more stringently than that for qualified investor hedge funds.

Said Visagie: “When newly regulated hedge funds become available in the near future, we expect additional investments given that the majority of investors understand and are comfortable with the collective investments scheme structure, and the additional regulatory oversight and risk management that applies to hedge funds.”